Digital technologies today are transforming the global financial landscape on a major scale, significantly affecting the monetary policies and primarily the digital currencies of central banks, or CBDC. As of the end of 2023, more than 100 countries were using this tool, including Russia that launched the pilot digital ruble project in August 2023 and is now in its second phase. Risks related to implementing the digital ruble, as well as the prospects and opportunities that this third form of money creates, were in the focus of the session called Digital Ruble: The Theory and Practice of Using Digital Currencies in Domestic and Transborder Transactions, held during the Digital Currencies and Assets: Challenges and Prospects conference. The conference was organized by the Russian Academy of Sciences’ Institute of Economics and the Higher School of Economics.
CBDC drivers
The digital ruble project is part of the global trends, and the chosen architecture and design are generally in line with the worldwide tendencies, according to Dmitry Kochergin, Chief Research Fellow of the Russian Academy of Sciences’ Institute of Economics. However, the expert suggests that the concept requires further refinement, particularly in terms of adding incentives to encourage its use.
“We need to introduce various economic incentives for end users to actively adopt digital currency, ensuring it doesn’t remain a niche product,” Dmitry Kochergin explains.
For instance, a unified digital registry could be established on the digital ruble platform to facilitate settlements using both digital financial assets and tokenized deposits, as well as stablecoins. At a functional level, incentives might include interest accrual on digital wallet balances, though this option is not currently under consideration.
Another important direction is leveraging the digital ruble for cross-border transactions, such as within multi-currency platforms.
“The model of interconnected national systems, along with a unified multi-currency system for digital currencies that allows direct or indirect access for foreign providers to the digital ruble, could be highly promising for enhancing the efficiency of global settlements,” Dmitry Kochergin says.
This approach would also enable the creation of a network for wholesale and retail cross-border payments as an alternative method of trade financing amid sanctions.
CBDC vs. traditional banking system
There’s no denying that the traditional banking system is facing a crisis, driven by excessive centralization and a growing weariness with conventional settlement practices. Issues like lengthy transaction chains, numerous intermediaries, high costs and fees, complex compliance procedures, and limited transparency all contribute to this challenge. As a result, the need for new settlement tools, particularly for cross-border transactions, is becoming increasingly pressing.
But can central bank digital currencies, like the digital ruble, serve as such a tool? There are significant risks associated with them, cautions Viktor Dostov, chairman of the board of the AED Association of Electronic Money and Money Transfer Market Participants and senior research fellow at the Financial University under the Government of the Russian Federation.
“The digital ruble inevitably disrupts the current banking system and introduces substantial system-wide challenges. Tokenizing non-cash funds in commercial bank accounts, or tokenized deposits, appears more promising. This approach preserves the banking system, simply elevating the funds to a new technological standard,” Dostov explains.
Certainly, we are discussing the concept of tokenization, but the Agora project, initiated by the Bank for International Settlements, is already underway in Europe. This project is currently testing the integration of tokenized bank deposits into existing banking systems. If successful, the expert believes it will represent a significant advancement.
Would financial services become inaccessible?
Artem Genkin, Doctor of Economics, Professor, and President of the NPO Center for the Protection of Bank Clients and Investors, highlights a distinct set of risks linked to the use of the digital ruble and central bank digital currencies in general. These risks include emerging forms of digital inequality stemming from the programmability of central bank digital currencies, which allows for their potential manipulation, as well as the complete transparency and full traceability of all transactions.
Ultimately, the implementation of these currencies may be accompanied by regulatory oversight that could impose restrictions on access to financial services.
“These could include spending restrictions, such as a closed list of approved recipients from the Central Bank of the Russian Federation or prohibitions on specific transactions. The range of goods and services available for purchase, as well as the geographical validity of the funds, may also be regulated. Additionally, users might have the option to color the money – for instance, parents could do this to monitor their children’s spending,” Artem Genkin says.
Moreover, there is the potential for limitations on the validity period of the funds or the introduction of negative interest rates.
Such an approach risks leading to discrimination, if not a form of digital dictatorship. The most notable example is the social ranking system implemented in several regions in China, which has made entire asset classes, certain types of transactions, and even basic purchases like plane tickets inaccessible to individuals with low ratings. The creation of both formal and informal markets for new assets, along with multiple market rates, cannot be discounted.
“Money with limited liquidity will be cheaper, and transactions involving it will occur at a discount. Maintaining a 1:1 exchange rate will be extremely challenging,” the expert notes.
Yet, positive effects of the adoption of CBDCs will also be substantial, such as effective control of transactions, fiscal responsibilities, and prevention illegal operations and actions by unscrupulous market players, not to mention reduced cash circulation costs as well as the dedollarization of the economy.
A reasonable balance in this regard could be achieved through an approach that involves introducing systematic risk management plus a set of organizational, technical and legal measures prior to the full implementation of the new system.
“The primary focus will be on pursuing the principle of technological neutrality that is easily comprehensible to the public, economists, and regulators. It presumes that both traditional banking and central bank digital currencies have similar compliance requirements, budgets, and tax controls,” Artem Genkin believes.
Back to the future
The introduction and subsequent extensive use of the digital ruble will indeed bring transformations, and drastic ones at that, agrees Alexander Yakovlev, associate professor at the Department of Technopreneurship Economics of St. Petersburg Electrotechnical University LETI. This is essentially not about changes for banks but about changing the entire system of economic relations, with the digital ruble project assuming a monopoly of the state represented by the Central Bank, both on the emission of the new form of money and its circulation.
“Previously, this was not the case; the circulation was handled by a private banking network, with huge profit gained. Today, the government is asserting control over it, which is a fundamental difference,” Alexander Yakovlev clarifies.
This is also evidenced by the paradoxical similarity of the digital ruble concept with a premise in the Communist Manifesto of 1848: “Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.”
Network effects
The adoption of the digital ruble will indeed affect various aspects of the banking industry, including profitability, capitalization, liquidity, and stability of financial institutions, according to Marina Abramova, Head of the Department of Banking and Monetary Regulation and leading research fellow at the Institute of Financial Research of the Financial University under the Government of the Russian Federation.
However, this will happen only in case digital ruble actually goes mainstream and becomes a significant factor in the advancement of the monetary and payment system. Currently, only 12 banks can conduct transactions that involve the digital ruble. Although the number is going to be expanded nearly twofold to 19, the pool of testing participants remains limited: at the initial stage, it included 600 people and 22 companies, while now it involves 9,000 people and 1,200 companies.
For now, the digital ruble seems to represent a small segment of the market, with the trend expected to continue even in the long run until 2030, Marina Abramova clarifies, adding that it is too early to talk about achieving a network effect.
“If the Bank of Russia seeks to make the digital ruble an extensively used means of payment, it should pursue a corresponding information policy to popularize the new tool and actively engage sellers of goods and services to encourage citizens to use the digital ruble. Information policy and efforts to build trust in monetary authorities should be the basis,” notes Yelena Sinelnikova-Muryleva, senior research fellow at the Center for Central Banking Studies at the Institute for Applied Economic Research of the Russian Presidential Academy of National Economy and Public Administration.
Slowdown or caution?
Despite plenty of advantages, projects to implement the central bank digital currency are being hindered all across the globe, mentions Mikhail Golovnin, Director of the Institute of Economics of the Russian Academy of Sciences. Yet, this appears to be a cautious approach rather than disappointment in the technology.
“Indeed, we see certain projects slowed down, but this is only natural due to the monetary sector being highly conservative; its evolvement requires a new outlook and methods, and therefore, it takes a while to comprehend it and develop a legal framework,” Dmitry Kochergin clarifies.
Obstacles were caused by some extent by the effects of COVID-19 restrictions as well as the sanctions policy, which altogether led to greater global division. The trend can also be explained by the lack of a common motivation among regulators who were initiating projects to introduce digital currencies.
The prospects for the introduction and common use of the digital ruble will depend on the opportunities the tool will provide to users. In this context, drivers could include accrual of interest on the digital ruble balance as well as equally important options of using the digital currency for offline payments and enabling transactions without any intermediaries.
Additionally, the new form of currency could be adopted gradually in different sectors.
“I am almost totally confident that at the beginning the digital ruble will be introduced for social transfers, such as pensions and benefits – that is, initial efforts will focus on establishing patterns of consumption and work with the digital ruble as well as basic technical operations in the budget sector,” Artem Genkin concludes.